November 22, 2020
Best Ever CRE Team

Justifying College Tuition? – Check Out These Numbers!

Every year I am astounded by the rising cost of college tuition and I feel for the students lining up to pile on massive debt before they even have a chance to start earning an income or know what job opportunities might be on the other side of this 4-year commitment. USA Today recently published an article stating the average cost of tuition in the U.S. is now around $48,510.

It’s been more than a decade since I graduated from college and my perspective has not changed. At age 18, if I had to pile on $48,510 in debt in order to obtain a 4-year degree, I simply would choose not to attend. If I had $48,510 sitting in cash, I would question very seriously if a college degree was the best use for my capital.

Before the hate mail starts rolling in, allow me to clarify… I am not advocating that your high school graduate should not attend college; however, I do think it’s worth asking yourself the question:

What is the ROI (return on investment) from a 4-year degree vs investing that same amount of money?

I ran an analysis for educational purposes. I am well aware that college is not only about dollars and sense. There are certainly reasons to pursue a college degree despite the financials and there are many careers that 100% require a college degree. But since I am a nerdy numbers guy and an investor, I’m ran the numbers for those like me who are interested in this kind of “fun”.

College Tuition Cost 2020-2021

In addition to the USA Today article mentioned at the beginning of the blog, I came across an article on which compares the annual cost of college from in-state public institutions, out-of-state public institutions and private colleges. We can conclude from the information and surveys conducted in these articles that $50,000 is a conservative figure for how much a student might spend on 4 years of college tuition these days.

How Much Do High School and College Graduates Earn?

Now that we know the average tuition costs, we need to better understand what a typical 4-year degree graduate earns in salary vs what a typical high school graduate earns. To help answer this question, I will reference The Bureau of Labor Statistics (BLS) which reports that Americans with a bachelor’s degree have median weekly earnings of $1,198, compared to $730 a week for those who have a high school diploma. To convert these into annualized figures, that is $57,504 (bachelor’s degree) vs $35,040 (high school degree).

Long-Term Investing Returns

I chose to use a 9% annualized return figure to represent the “alternative to college” investing scenario for two reasons. First, 9% is based on the historical stock market returns since inception (1926 to 2020) and secondly 9% is a conservative figure based on my actual real estate cash flow performance (2009-2020).

Let’s Compare The Two Scenarios:

Scenario #1 Johnny chooses to pursue a 4-year degree and spends $50,000 his parents saved for him to attend college. After graduating, Johnny finds a job that pays him $57,504 a year and receives 4% raises for the next 20 years. *Note: For sake of this example, I am not factoring in the added cost and complexities of financing the tuition; many students have this added to their plate as you and I know.

Scenario #2 Sally chooses to enter the workforce after graduating high school and ties down a full-time job earning her $35,040 a year and also receives 4% raises for the next 20 years. However, rather than spending the $50,000 her parents saved for her to attend college, Sally chooses to invest this capital into the stock market and real estate instead.

Now, let’s fast forward 20 years…

Scenario #1 Since Johnny spent the first 4 years after high school attending college, that means he has been earning a steady full-time salary for 16 years in a row and has been receiving 4% annual raises. Johnny now earns an annual salary of $107,703.91 thanks to the continuous 4% raises. In total, Johnny has earned $1,305,190 in his working career.

Scenario #2 Since Sally did not attend college after high school, she has been working for 20 years in a row and has been receiving her annual 4% raises as well. Sally now earns an annual salary of $76,776.95 thanks to the continuous 4% raises. In total, Sally has earned $1,085,160 in her working career. But wait! What about the $50,000 investment Sally made 20 years ago? The current valuation of her investment is now $300,457.58 thanks to the 9% annualized returns she’s been earning. When you deduct Sally’s initial contribution of $50,000, she has earned an additional $250,457.58 on top of her $1,085,160 salary earnings. Combined, Sally earned $1,335,617.58 compared to Johnny who earned $1,305,190.

Sally exceeded Johnny’s earnings over 20 years without a college degree AND she kept her initial $50,000 nest egg.

The Power of Investing Prevails!

On a serious note, college is a big decision and is offered at an ever-increasing cost. While college may have been a wise investment in 1971 when tuition was about 1/10th of the cost today, it’s worth asking yourself some tough questions if your children are considering attending:

#1 Is the decision to attend college based on social pressure, peer pressure or the negative stigma of “not attending”?

#2 How much of a setback would $50,000 of debt be on your child? How about $100,000 in debt? At what price, does college stop making sense?

#3 Does your child have a strong “WHY” for attending college?

#4 If your child’s desired career path does not require a college degree, then does college still make sense? Consider business owners, sales professionals, entrepreneurs, and vocational trades for example.

I’d love to hear your thoughts. Feel free to reach out with any comments or feedback. Thank you for reading.

To Your Success,

Travis Watts

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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